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Environment Magazine September/October 2008


May/June 2008

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Prosperous Negligence: Governing the Clean Development Mechanism for Markets and Development

In the context of climate change and its unequal distribution of costs and benefits, much is to be gained and lost as the global carbon market evolves and expands. In the developed world, the name of the game is balancing political will with the costs of reducing greenhouse gas emissions and the risks of climate change; in the developing world, the main concern is development and adaptation. The Clean Development Mechanism (CDM) of the Kyoto Protocol to the United Nations Framework Convention on Climate Change (UNFCCC) appeared to be an arrangement that could address both of these agendas and, additionally, slow emissions growth in an arrangement that could address both of these agendas and, additionally, slow emissions growth in rapidly industrializing states such as Brazil, India, and China. Engaging these countries in carbon abatement is essential to any long-term climate change solution as well as prevention of what many would consider dangerous climactic changes.

The CDM emereged as an initiative of less-developed countries that perceived the Kyoto Protocol’s emissions-reduction mandates as a threat to their development plans. By incorporating a high-powered market mechanism to channel resources for sustainable development activities to less-developed countries, the CDM tempered opposition to Kyoto and its possible negative effects to growth in the developing world. The CDM works by allowing an emissions-capped developed country to count greenhouse gas reductions from a non-capped developing country toward its domestic quotas. For example, Norway may finance an electricity cogeneration project at a sugar plant in Brazil. The project would, in turn, generate certified emission reductions (CERs), each of which represents a one-ton reduction of carbon dioxide (CO2) equivalent. If Norway cannot meet all its Kyoto commitments through domestic action, or if it is cheaper to fulfill those commitments by reducing emissions in a less-developed economy, Norway may either sponsor the cogeneration project and deduct the ensuing CERs from its domestic commitments, or, alternatively, Norway may purchase CERs generated unilaterally from another sugar plant that financed its own CDM project.

Brazil and Norway would both benefit in this hypothetical deal. Revenue, and perhaps technology, would flow to Brazil; Norway would shrink its compliance costs; and lower overall costs would accommodate more aggressive global targets. The ostensibly win-win nature of the CDM at its inception supported the interests of actors as diverse as business groups in developed countries; policymakers in developing countries; and nongovernmental organizations, development practitioners, and community leaders looking for another approach to improve the lives of those in less developed countries. These diverse interests are ensconced in Article 12 of the Kyoto Protocol, which created the CDM and defined its dual objectives as

to assist Parties not included in Annex I [developing countries] in achieving sustainable development and in contributing to the ultimate objective of the Convention, and to assist Parties included in Annex I [developed countries] in achieving compliance with their quantified emission limitation and reduction commitments under Article 3.

A decade has passed since this definition was written, and CDM projects have been under way for about six years. By the end of 2006, the value of the global carbon market ballooned to more than US$30 billion—and it is growing. More than US$5 billion stemmed from CDM projects at the outset of 2007. As of November 2007, 827 CDM projects have been registered by the CDM Executive Board, more than 150 projects are attempting to register, and nearly 1,700 projects are at some earlier stage of the project cycle (see Figure 1 on page 21 for an outline of the project cycle). Taken together, by 2012, these projects should reduce about 2.3 billion tons of CO2 (or other greenhouse gases calculated in terms of their warming potential relative to CO2).  For the impoverished people and struggling economies particularly vulnerable to climate-related stressors such as sea-level rise (as in the Maldives), drought and desertification (as in Tanzania), or reduced snowmelt (as in Chile), the increasing value and awareness of the carbon externality is good news (albeit insufficient). But as the US$5 billion from CDM projects doubles and quadruples, we should start asking ourselves: how are CDM projects affecting people on the ground?

The fundamental importance of this question far exceeds the current understanding of its answer. Although for more than six years the CDM has successfully engaged developing-country actors in carbon abatement, attracted foreign investment to industrializing countries, and allayed mitigation costs for developed countries, the effect of the CDM on development and local livelihoods has been mixed at best. Empirical evidence from projects around the world shows that CDM implementation in most countries is falling short of its goal to promote sustainable development. A 2007 review of the first 16 registered CDM projects found that while 72 percent of purported greenhouse gas reductions were reliable, less than 1 percent contributed significantly to sustainable development. The study examined local employment generation, the distribution of carbon revenue (based on the project’s ownership structure), and local air-quality effects to indicate a project’s sustainable development dividend. Studies like this are valuable for suggesting the extent of CDM market imperfections; however, since there remains a dearth of published case studies at particular project sites that explore sustainable development links, heavy emphasis is placed on analyzing the documentation required in the CDM process. Nevertheless, project documents, market trends, and the few case studies available generally all point to a troubling poverty of local co-benefits.

The CDM’s poor track record of supporting sustainable development has generated a good deal of criticism from scholars, nongovernmental organizations, and practitioners. Quite understandably, the CDM’s dual objectives raised high expectations for substantial development dividends. To date, much of the criticism focuses on the inequitable distribution of CDM projects to rapidly industrializing states over poorer ones, and on the suboptimal distribution of carbon revenue to types of CDM projects that benefit large industrial actors instead of local populations. Stanford University international environmental law professor Michael Wara, along with many others, argues that in this sense the CDM is failing; rather than facilitating transitions to low-carbon development pathways, it is subsidizing the refrigerant, nylon, and fertilizer sectors in a few large developing countries.

Failures of inequity in project distribution and suboptimality in project choice are real, pervasive, and concerning. And while some piecemeal remedies may improve many aspects of the CDM, evidence indicates that these failures are manifestations of deeper failures of governance—that is, the processes by which transnational decisions that affect the CDM and development are made, implemented, coordinated, and integrated. Right now, global problems and their solutions are fragmented and mismatched, while sustainability science and practice call for integration and adaptability. Indeed, there is an opportunity cost to maintaining the CDM implementation status quo. At best, the fact that sustainable development goals for the CDM play a secondary role weakens its potential to transform livelihoods in developing countries. At worst, it delays and competes with more effective action and joins the ranks of sustainable development mechanisms that fall short of intentions.

Part of the problem may be that the development goals of the CDM need to be more boldly defined to meet global agendas for environmental and social sustainability, such as those articulated in the Millennium Development Goals (MDGs). Neither the CDM nor any other governance instrument is the silver bullet to achieving the MDGs; however, insights from theory and a peppering of examples in the CDM and voluntary carbon markets suggest that achieving MDG benefits from well-designed carbon reduction projects is possible. Improving responsiveness and accountability within the CDM’s structure would align it better with the principles of good governance and foster not only sustainable development outcomes but also positive synergies between project implementation and the MDGs.

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